‘We’d be in huge trouble:’ A former Bank of England economist warns of the fragility of the UK’s financial system

LONDON – Sir John Vickers, a former chief economist at the Bank of England, has warned that the UK banking system is vulnerable to shocks and that regulators are simply not prepared to handle a large crisis.

Vickers, who led a reform of banking rules in 2011, said policymakers had not gone far enough to make the financial system bullet-proof following the 2008 crisis, and were putting their faith in untested tools.

“There are tools, these so-called resolution tools, which didn’t exist 10 years ago, which I think shift the odds in a slightly more favourable place,” he said.

“But I certainly wouldn’t bet on those working perfectly. And I worry that the Bank of England and regulators internationally are placing huge reliance on these new, untried, untested tools working. That is a huge assumption to make,” he added.

Banks need to double the amount of capital they use to back their activities, said Vickers, whose post-crisis commission on banking in 2011 recommended splitting retail deposit taking from investment banking activities.

“I think we’ve done some good building but there’s an opportunity there to go a lot further, which should be taken. But the current policy stance is, no we don’t need to.”

He added: “I think the arguments, the evidence, the costs and the benefits, points to a need to go quite a bit further. I’d say we’re roughly, global level, halfway of where we ought to be.”

Sam Woods, CEO of the Bank of England’s Prudential Regulation Authority, said he had seen a potential return “to the punchbowl” in a speech in July, highlighting concerns that some banks are loosening their internal controls to create more credit and boost risk.